Capitalism, Game Theory, and Economic Trends

Capitalism

ADAM->Capitalism is an economic and social system that appeared at the beginning of the 19th century. The ancient middle class used to live in fear and in a constant state of survival; and only the upper class could afford the best things. Nowadays, due to capitalism, life has changed for people from the middle class. They are able to buy things that the ancient upper class used to enjoy, but with the difference that the new middle class works to afford those things. Capitalism is based on four main ideas:

1. Division of labor and exchange: Division of labor leads to specialization, and specialization generates higher levels of productivity. For people to specialize, it is important that goods and services that have been created before can be exchanged.
2. The voluntary exchange of goods that benefit both parties: In the world, there are more goods and services that need to be traded (exchanged). When trade is voluntary, both parties end up winning, because no one is going to accept to trade something knowing that it is going to make things worse.
3. The “invisible hand”: This consists that in a market economy, people try to satisfy themselves in any way, but at the same time, they are benefiting the rest of society.

Who maintains the discipline of producers and forces them to sell what consumers want at the lowest price is the possibility that consumers have to punish those who do not do it well, based on not buying and going to the company that does it best.

Game Theory

JOHN NASH->Game theory is the study of strategic behavior when two or more individuals interact and each individual’s decision results from what he (or she) expects the others to do. That is, what should we expect to happen from the interactions between individuals? There are two possible ways to analyze it:

• Non-cooperative game theory: The “non-cooperative” characteristic is in how they choose and what they know about the other players when choosing: in general, individuals are supposed to make their decisions independently of each other while knowing their opponents and the possible strategies they have at their disposal. That is, they are selfish individuals but who try to predict what other agents will then act at their own convenience.

The conclusion is that selfish competition can lead to conditions that are inferior (in terms of personal and social benefit) to cooperative conditions, but that the latter could not be implemented unless there are external reinforcements that oblige the parties to comply with the cooperation. A Nash equilibrium of a game is an agreement that neither party can break at its discretion without losing. That is, if someone wants to break the pact and does so unilaterally, they risk earning less than what they would have earned under the pact.

Behavioral Economics

Richard Thaler, an American economist, was awarded the 2017 Nobel Prize for Economics for his contributions to behavioral economics, a field of microeconomics that applies the findings of psychology and other social sciences to the study of economic behavior. His major contribution to economics was to introduce a series of predictable ways that people make errors and to make it acceptable to begin modeling those kinds of deviations to make for a richer and more accurate description of human behavior in the field of economics. Several principles have emerged from behavioral economics research that have helped economists better understand human economic behavior. From these principles, governments and businesses have developed policy frameworks to encourage people to make particular choices. In behavioral economics, a “nudge” is a way to manipulate people’s choices to lead them to make specific decisions: For example, putting fruit at eye level or near the cash register at a high school cafeteria is an example of a “nudge” to get students to choose healthier options. An essential aspect of nudges is that they are not coercive.

Inequality

Inequality->The rise in economic inequality in the U.S. is tied to several factors. These include, in no particular order, technological change, globalization, the decline of unions, and the eroding value of the minimum wage. We can reduce inequality by:

• Increase the minimum wage: Research shows that higher wages for the lowest-paid workers have the potential to help nearly 4.6 million people out of poverty and add approximately $2 billion to the nation’s overall real income.
• Build assets for the working class: Policies that encourage higher savings rates and lower the cost of building assets for working and middle-class households can provide better economic security for struggling families.
• Invest in education: Differences in early education and school quality are the most important components contributing to persistent inequality across generations.
• Make the tax code more progressive: It is a great irony that tax rates for those at the top have been declining even as their share of income and wealth has increased dramatically.
• End residential segregation: Higher levels of racial residential segregation within a metropolitan region are strongly correlated with significantly reduced levels of intergenerational upward mobility for all residents of that area.

Public Goods

Public goods->Most economic arguments for government intervention are based on the idea that the marketplace cannot provide public goods or handle externalities. Public goods have two defining characteristics: They are non-excludable and non-rivalrous. The first characteristic, that a public good is non-excludable, means that it is impossible to exclude someone from using the good. However, if national defense is being provided, then it includes everyone. Non-rivalrous means that when one person uses the public good, another can also use it. Externalities occur when one person’s actions affect another person’s well-being and the relevant costs and benefits are not reflected in market prices. A positive externality arises when one person’s actions benefit another, and a negative externality arises when one person’s actions harm another. Markets often solve public goods and externalities problems in a variety of ways. Businesses frequently solve free-rider problems by developing means of excluding non-payers from enjoying the benefits of a good or service. Public goods can also be provided by being tied to purchases of private goods. For example, the shopping mall finances the services (lighting, protection services…) through receipts from the sale of private goods in the mall. The public and private goods are “tied” together. However, there are also cases where public goods cannot be privately provided. The most famous example is lighthouses; if private lighthouse owners attempted to charge ship-owners for lighthouse services, a free-rider problem would result. Instead, they sold their service to the owners and merchants of the nearby port. Port merchants who did not pay the lighthouse owners to turn on the lights had trouble attracting ships to their port. Other public goods problems can be solved by defining individual property rights in the appropriate economic resource. For example, the benefits of a clean lake are enjoyed by many people, and no one can be charged for these benefits. Nevertheless, if there is an owner, that person can charge higher prices to fishermen, boaters, recreational users, and others who benefit from the lake.

Global Tax

Global tax-> Large multinational corporations have traditionally been taxed based on where they declare their profits rather than where they actually do business. This allowed several large companies to avoid paying high taxes in countries where they do most of their business by shifting their profits to low-tax jurisdictions. The United States, which proposed the 15 percent minimum corporate tax rate, has long looked for ways to minimize incentives for companies to shift profits abroad to lower their tax bills. The deal also allows a government to impose top-up taxes on the subsidiary of a foreign company if it declares profits through its home headquarters in a different country and pays less than 15% taxes on those profits. The deal goes beyond setting a global rate; it also creates new rules for the digital era. With this agreement, technology giants (Amazon, Facebook…) will be required to pay taxes in countries where their goods and services are sold, not only where they have a physical presence. Supporters of the global minimum corporate tax agreement believe that it will help stop the “race to the bottom” as countries compete against each other to cut taxes to attract businesses. They believe this will shore up tax revenues and help governments invest in social development. The devastating global economic impact from the coronavirus pandemic was decisive to get the deal done. This new minimum tax rate, as the O.E.C.D has established, would only apply to companies with annual revenue of more than $866 million.

Two-Sided Markets

TIROLE->_{One of Tirole’s main contributions has been in the area of “two-sided markets.” Consider Google. It can offer its services at one price to users (one side) and offer its services at a different price to advertisers (the other side). The higher the price to users, the fewer users there will be and, therefore, the less money Google will make from advertising. Google has decided to set a zero price to users and charge for advertising.}

_{He also said that industries should be regulated differently depending on their distinct characteristics. Many Internet companies, for instance, give their products away free, which means that antitrust law built on pricing is irrelevant. But as a result, they grow so fast that they can quickly become monopolies.}

_{For regulators, tech companies have been a riddle in part because they do not follow the behavior of typical monopolies: Many do not charge for their products, and companies that offer entirely different products are nonetheless competitors. For instance, Google’s chairman, Eric Schmidt, argued in a speech on Monday that Google’s biggest competitor in search is Amazon and in mobile is Facebook — even though neither one is a search engine.}

_{Digital market forces drive huge efficiency gains.}